Sharing a Trade and Taking Profits. Further Discussion

Hi Mark,


August was tough for me. 

Same boat.  I had a very difficult August expiration

I mostly do bull put spreads (spreads
thanks to your sage advice) and I’ve been guessing wrong on the bottom
recently.  That’s why I’m looking at condors.  It would be calming to
have a strategy that over a year’s time frame can be expected to produce a
profit: 20% annually would be great. 

No guarantees, nor am I suggesting it’s a cinch to achieve, but
that’s a fairly conservative goal for IC traders. 


Please check my math here—for 10 point
wings, a $0.50 gain from the premium for 90 days gets me to the 20% level,
ignoring compounding and commissions:  $.50/10*4. = 20%.  (From your
blog, I know this is way too little premium, and I concur.  But it gives
me a reference point.)

As to your math, it’s good, but can be
refined. You divided the maximum gain ($0.50) by the spread width – which is
also the basic margin requirement for the iron condor.  But that requirement is reduced by the cash collected
and thus, the VAR (value at risk, or your maximum loss is really $9.50).  In addition, 90 days is not quite ¼ of a


Thus, a better equation is $0.50/$9.50 *
365/90 = 21.34%.

Better yet, is to reduce your maximum
profit by your commissions.


So your real
life example
on the thread of about $3.00 initial credit with a plan to
close with $1.95 debit make this look like a strategy to learn.


(Math check  $1.05/10*6 = 60%, I
think you are only going out 60 days or so.) 

Math ok. 
But refined:  $1.05/$8.95 *
365/t  (where t= # of days position is
held).  I discussed going out 30 days and
holding for about half that time.  Thus t
= approximately 15.  In that case, ROI =
285%.  You must understand that returns
this high do not come without very
high risk.


Yes, this method has its merits.  But right now I’m still leaning towards
managing the iron condor on a daily basis, rather than face a mandatory close
once the target profit is achieved.
This method has one super advantage:  You make your money
much sooner and that allows you to be completely out of the market for 2-3
weeks – or about 50% of the time.  Think of how much risk that
eliminates!  How do you quantify that?


BUT – if you are systemically forced to close for a loss this
(or any) month (if you established a maximum gain by planning to close early,
there MUST be a maximum loss that’s not too much larger than the maximum gain) how
would you feel about taking that loss and then doing nothing for the next
couple of weeks before it’s time to establish new iron condors for the next
expiration?  For most traders, that’s
difficult, if not impossible.  There’s
always that urge to get


That's where this methodology may fail – too many may be unable
or unwilling to take the loss under these conditions.  I have no trouble taking losses using my
current methods  (manage position without
an automatic closing price), but when that happens I always have other
positions that can make some money. 
Sitting idle may not be very easy.  

A disciplined trader has
no problem with this part because he/she knows to enter new positions only when conditions are right – not
when you feel the need to recover from a losing trade.  That's the problem as I see it.  This
method requires more discipline than 'regular' iron condor trading.
you are a disciplined trader, then this method is worth learning.  You may decide that it’s appropriate for a
portion (or even all) of your iron condor trading.  But, with such discipline required, it’s not
for everyone. 


I’m undecided whether to adopt this
method, and plan to test drive in small quantities.


One other question is whether going out
farther on the short calls and puts, i.e., more than 1 standard deviation would
make sense.

Yes, but it's a
trade-off.  Do you prefer the faster time decay and more risky negative
gamma offered by front-month options?  
Or are you more comfortable trading further OTM options with better
gamma, but slower time decay?  It's your comfort zone. Neither is 'better'
than the other.  But, if it's easier for you to manage risk with one type
than the other, choose that one. 


When trading iron
condors, earning profits is a cinch.  There are plenty of profits. 
IS DOOMED (IMHO), and that’s especially true in this high risk/high reward
method for trading iron condors.


P.S. Thanks for your thoughts on “point
of maximum acceptable loss



2 Responses to Sharing a Trade and Taking Profits. Further Discussion

  1. Mike S. 08/23/2008 at 3:26 AM #

    Hi Mark, I bought 1 contract on .ftqkz at the ask price of $8.90.I knew the last trade was at $10.50 I didn’t think this mattered, because I was going off the bid ask spread. When I received my order as being filled it said I all ready LOST $3.74 on my trade. What did I do wrong, and where can you tell me how to do it right?
    The reply to this question appears in a separate blog post:

  2. Mark 08/23/2008 at 10:55 AM #

    Hello Mike,
    FTQKZ is the First Third Bank Nov 2.50 call.
    1) You are correct; the last trade does not matter.
    2) Using the current bid/ask spread is the right way to determine how much to bid for the option you wanted to buy.
    3) You did nothing wrong, except for something mentioned below.
    4) As far as I am concerned, it’s impossible for you to have lost $374 per contract – especially losing it immediately. That leads me to conclude that your broker made an error in determining the price at which the option was ‘marked’ (valued at end of day).
    This is an option that is easy to value. It’s so deep in the money that it has little or no time value. Thus, the end of day value (the value that appears on your daily statement) is essentially the intrinsic value of the option (stock price minus strike price). Right now, the stock is $14.63 and the value of your call is $12.13.
    If you paid $8.90, then the stock would have to be trading near $11.40 ($8.90 + $2.50). The stock hasn’t been that low for awhile. Did you buy this option one month ago and are first asking about the trade now? I think it’s much more likely you may have made an error. It’s possible you intended to buy the FTQKZ, but clicked on FTQKA (the Nov 5 call) instead. Check your positions to be certain you really own the Nov 2.50 call. It’s unlikely you made this error, but it’s also unlikely your broker’s pricing of the option was so incorrect.
    As an aside, I believe you made a mistake buying this call option. It saved you very little cash compared with buying stock. One of the reasons for buying calls is to cut risk in case the stock declines rapidly. This option would save you nothing on a stock decline, because it’s so deep in the money. Furthermore, you subjected yourself to a wide bid/ask spread when you bought the call (the market in the stock is MUCH narrower) and will face that same bid/ask spread when you decide to sell the option. And I’ll wager that your broker charges a higher commission to buy one call than it does to buy 100 shares. Buying deep in the money options has its advantages, but not when the strike price is so low.